Did we learn anything from the subprime loan crisis?

Robert Ehrlich says the government's foray into risky lending practices suggests we have not

April 21, 2013|Bob Ehrlich

A dangerous confluence of recent business stories have been attention grabbers. First, the Obama administration announced an initiative to ensure more home loans for those with weak credit. Then, a number of prominent economists issued forecasts reflecting a slowing economy over the next several quarters.

For the public, it's déjà vu all over again: an all-knowing federal government again pushing its way into the housing market against the backdrop of a softening economy. Yet again, we hear calls for banks to facilitate more home loans to mortgage seekers with less-than-stellar credit. And all in the name of helping young people and those with poor credit histories secure a house.

But the ink still isn't dry on the bad (mortgage) paper and lawsuits generated as a result of the government's last attempt to manipulate risk. How quickly we forgot about that five-year recession brought about by government-sponsored risky loan practices. The downturn has been referred to as the greatest economic calamity since the Great Depression. The president said so himself!

The various villains who played significant roles in producing our historic mortgage meltdown are described in Chapter 6 of my book, "Turn This Car Around." In no particular order: Republicans and Democrats who sold the romantic notion that everybody should own a home, regardless of income or credit history; progressives who perfected the art of using the Community Reinvestment Act (CRA), a federal law aimed at race-based redlining practices, to leverage banks; negligent Wall Street rating agencies; greedy Wall Street investment firms; and a too-late-to-the-party Securities and Exchange Commission.

All played a significant role in the monumental crisis. Many have paid and are continuing to pay large fines, penalties and legal awards to an unending list of plaintiffs — most notably the federal government. And some of the worst (individual) actors have ended up in the clink. It's all there, including the few (mostly Republicans) who had the foresight to scream bloody murder during the heady days of the mortgage-backed securities boom. Alas, these select few were rewarded for their diligence with charges of racism by certain members of Congress and the progressive left. It's a familiar narrative to congressional observers: Simply oppose any extension of the CRA, then get ready to defend yourself against accusations of racism and redlining.

That politicians, regulators and private-sector investor types played prominent roles in the underwriting of so many bad mortgages is widely acknowledged. But another group deserves equal attention: the community activists (ACORN and its progeny) who engaged in regular "outings" of banks unwilling to write riskier loans in marginal neighborhoods. It was economic development by shakedown — underwrite even more subprime loans in return for community peace and a passing report on your CRA review. Unfortunately, too many banks complied.

There are just so many bad loans that can be rolled into new investment instruments (subsequently sold to the world) before things go south. In this case, "south" is defined as an economic crisis so severe that it erased almost 20 years of accumulated consumer wealth, according to the Federal Reserve's "Survey of Consumer Finances."

But now the feds wish to revisit "subprime lending land." Government again wants to substitute its judgment for the market's. (Seems those old community organizer habits are hard to break.) And yet again, it will be federal taxpayers on the hook for the inevitable cascade of newly mined bad loans.

One piece of good news for mortgage originators: Obama housing officials are asking the Obama Justice Department to reassure banks that they will not face severe legal consequences if (and when) large numbers of the newly issued loans turn out to be bad. Wow — bet everyone feels secure with their "get out of jail free" card.

Banks have suffered bad karma, and bad publicity, since the mortgage crisis began. Reports of obscene bonuses from Wall Street investment houses did not help. Neither did the generally successful but wildly unpopular TARP. And tighter underwriting standards in the post-crisis lending world have made life much more difficult for small business and the American consumer.

So, taxpayer beware: The government must be hyper-careful in reengaging banks in the subprime market. Indeed, mortgage creditworthiness should be a function of rational economic calculation and little else. Such is the hard (but familiar) lesson of our recent economic woes.

Note: As my column addresses issues of national importance, it is appropriate to add my condolences, thoughts and prayers to those of a nation grieving lives lost and lamenting the physical and emotional injuries inherent in the cowardly attacks of April 15. Please join me in expressing gratitude to American first responders for their extraordinary courage and selfless sacrifice in the face of danger every day. God bless America.

Robert L. Ehrlich Jr.'s column appears Sundays. The former Maryland governor and member of Congress is a partner at the law firm King & Spalding and the author of "Turn this Car Around," a book about national politics. His email is ehrlichcolumn@gmail.com.